Thursday, 7 March 2013

Supermax Corporation - Values emerged

The key takeaways from Supermax Corporation’s 4QFY12 results briefing include: (i) its 4QFY12 results explained, (ii) ASPs hike of 3%-5% to mitigate the effect of the minimum wage policy, (iii) potential cost savings of 40-50% on its labour costs, (iV) the expected growth from its 12 replacement lines and two new plants over FY13 and FY14 and (v) its dividend policy to be raised to 30%. The share price is down 14% from its high of RM2.06 in Jan 2013 compared to its peers of being only down by 2%, despite the results coming in within ours and the market expectations. The stock is currently trading at 9.0x FY13 EPS compared to an average net profit growth of 15% p.a. over the next two years. At the current market price, the stock offers a total return of 18.2%. Hence, we are upgrading our rating on the stock back to an OUTPERFORM from a MARKET PERFORM. Our unchanged TP of RM2.20 is based on 10.4x FY13 EPS. The targeted PER is at +0.5SD above the 5-year historical average.

4QFY12 results explained. The management shed more light on the company’s EBITDA contraction in the briefing. Recall that the company’s 4QFY12 EBITDA rose 18% QoQ to RM50.7m despite the EBITDA margin being compressed to 15.7% as compared to 17.4% in 3QFY12. The erosion was actually due to forex losses and the additional cost incurred as a result of teething problems in the implementation of its automation and computerisation of its manufacturing processes. Elsewhere, the revenue rose 31% QoQ, driven by higher sales volume (+13%) and ASPs (+16%). Volume grew across the board on the back of an utilisation rate of 89% in 4QFY12 compared to 79% in 3QFY12. In terms of product mix, latex gloves accounted for 60% (3QFY12: 64%) and nitrile accounted for 40% (3QFY12: 36%).

ASPs hike of 3-4% to mitigate the effect of the minimum wage policy. Supermax has raised its rubber glove average selling prices (ASPs) by USD0.75/1000 pieces to USD1.25/1000 pieces (3%-4%) to between USD24/1000 pieces and USD31/1000 pieces with effect from 1 Jan 2013 to mitigate the effect of the minimum wage policy. We have already factored these revised ASPs into our earnings model. We understand that Supermax will incur labour cost of an additional average of RM1.0m per month due to the minimum wage policy or RM13m p.a. (9% of its FY13 net profit). Ceteris paribus, assuming ‘a no cost pass-through’ scenario and cost savings from levy borne by foreign workers, the minimum wage policy is expected to hit Supermax’s bottom line by 7.0% based on our back-of-the-envelope calculation. However, with the hike of 3%-5% in ASP, the net impact is estimated at 6% of FY13 net profit.

Supermax’s expect a cost savings of 40-50% on labour costs. To further reduce its reliance on manual workers to minimise the effects of the minimum wage policy, Supermax has invested in the automation and computerisation of its manufacturing processes and this is expected to be completed by end-2013. Some of the automations put in place include the (i) automated mechanical stripping system (removing gloves off hand moulds) and (iii) glove puller and stacker system. Once completed, Supermax’s expect a cost savings of 40-50% on its labour costs. However, we believe the full effect from this will only be felt from FY14 onwards.

Growth expected from 12 replacement lines and 2 new plants over FY13 and FY14. On Lot 6070, the decommissioning of the old lines with 12 new lines or 1.43b pieces of gloves (converting from the latex-based glove to nitrile) is now commercially ready. For illustrative purposes, based on a net profit margin of 10%, ASPs of USD28/1000 pieces and 1.43b pieces, this would generate a total net profit of RM12m or 8% of FY13 net profit. The other two plants namely Lot 6059 and Lot 6058 are expected to be on track to commission commercial production gradually starting from Jun 2013. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2b and 2.2b pieces of nitrile gloves respectively. This will bring its total nitrile production capacity from 6.9b to 12.3b pieces p.a. or 52% of the total installed capacity. The first line is expected to commence from June 2013. All in, we estimate that Supermax will incur a total estimated capex of RM60m in FY13, which we have factored into our earnings model.

Strategy to move downstream rather than upstream. We are positive on Supermax decision not to venture upstream including investment into rubber plantations due to its long gestation period. Instead, Supermax will focus on global sales & marketing, distribution and making inroads into new markets (like Turkey, Egypt and Uruguay) and growing its market shares via its own brand manufacturing (OBM).

Dividend policy raised to 30% from 20%. Another positive point is that Supermax has raised its dividend policy by raising the payout ratio from 20% to 30% in FY12. Based on this guidance and our revised FY13 and FY14 NDPS at the current market price, this translates to 3.3% and 3.7% in FY13 and FY 14 dividend yields.

Source: Kenanga

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